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Hiding Conflicts vs. Disclosing Them

Thursday, March 26th, 2009

Robert Wechsler

Hiding a conflict of interest can lead to much worse problems than
appearing before an ethics commission and getting your hand slapped, or
even getting slapped with a fine. A criminal case in Winston-Salem, NC
this week shows how bad things can get.

According to an
article in today's Winston-Salem Journal,
the chair of the Housing Authority of Winston-Salem allegedly hid his
interest in a property that was purchased at foreclosure and quickly
sold to the Housing Authority at a sizeable profit. He and his
associates were indicted on wire- and mail-fraud charges, as well as
money laundering.

The two partners in the company that sold the property to the Housing
Authority were local business people with no involvement in property
development until they served on a task force in the 1990s that
looked for ways to redevelop the city's east side. Usually the
problem is developers serving on task forces, not task force members
becoming developers.

This is the way the conflict was allegedly hidden. The partners sold
the property in 2002, but kept a second mortgage on it. When the
purchaser got into trouble, the other partner purchased the property at
foreclosure to protect the second mortgage, and then immediately
transferred the bid to the partners' company, which sold it to the
Housing Authority two days later at a 45% profit.

The Housing Authority had ten days to make an upset bid on the property
instead of purchasing it from the bidder, but that would have wiped out
the partners' second mortgage. The authority chair pushed for the
purchase, not disclosing his interest, and the purchase was made.

The authority chair says that everyone knew he had an interest in the
company that sold the property to the authority. One wonders if the
chair spoke out in favor of disclosure statements from people on boards
such as the housing authority. An invasion of privacy, he probably
would have said, if the topic came up. As I keep saying, ethics
programs are intended not only for enforcement against, but also for protection of government officials.